Wednesday, July 04, 2007

Government Versus Free Market

"Many (if not most) people believe that the Government can provide 'essential' services better than the free market. It's interesting to wonder why."

Because without any government services, you get an economy that resembles Somalia's. With limited government services, you get one that resembles Bolivia's. Most people, however, would prefer one that resembles a modern indstrial nation - that is, one with significant levels of government services. Like Canada, say, or Norway or Germany.

"I think that the main reason is that people think that the Government is altruistic, and therefore will provide the best service because it has the people's best intentions at heart, whereas the free market is driven by profit and therefore will over-price services and cannot be trusted."

That is a bit of a mis-statement of the right idea.

It's not simply that the government can be trusted and the private sector cannot be trusted. Rather, there are some things the private sector simply won't do because there's not enough profit in it. Like providing welfare to poor people. City-wide policing services. Epidemic prevention. Other sorts of infrastructure.

Also, there are numerous things that governments do more efficiently than the private sector. Imagine the chaos we would have if we had competing fire services (especially if people who didn't contract a service didn't get fire protection at all). If the government didn't create and run the army - who would? Microsoft?

The argument in favour of government involvement in the marketplace isn't simply one of trust. It is also one based on the organization and delivery of services. The model is different for government services, and this confers different strengths and different weaknesses.

Nobody, for example, would consider nationalizing 7-Eleven. Nobody wants the public service to run McDonalds. But it is equally absurd to think of these companies being responsible for, say, food safety and standards inspection.

"First: The government is not altruistic. Government officials want to be re-elected more than anything, so they will often make decisions based on pressure from lobbyists, unions, and other groups who have their sponsors rather than the ultimate consumer in mind."

Agreed. But the way this argument is stated is very misleading. "Lobbyists, unions, and other groups" indeed. In fact, by far the major contributors, the major lobbyists, are the businesses - exactly the people who would be running the show if the role of government were reduced.

If it's bad if the lobbyists have too much power over government now, then it's even worse when government is absent and these lobbyists are running the show.

"Second: Consumers are ultimately served best by goods and services that provide good value for money; a combination of cost and efficiency. Does a consumer really care why a organization provides a service, as long as it's good value for money?"

At certain extremes they do. Nobody wants the Klan service breakfast at the town fair, no matter how good the price.

But of course the presumption here is that the private sector always provides better value. In fact, it is easily arguable that in many cases the private sector provides much lower value. This is why, for example, the U.S. has slower internet speeds than many nations in the world.

If this is the case, then the argument that the private sector should always provide services becomes one based on dogma rather than reason. And it becomes reasonable to argue, that people won't mind services that are delivered by the government, if they are delivered efficiently. Most people, after all, have no problem with the government providing services.

"Third: Altruism is no guarantee of producing good value for money. An organization can have the best intentions in the world and still produce an expensive, poor product."

Quite true.

But it doesn't follow from this that altruistic organizations produce poor value for money.

And it is arguable that altruistic organizations are more likely to provide value for money than organizations that are designed solely to make money.

The 'no guarantee' type of argument offered here tempts the reader to ignore the other alternative. But in reality, the two alternatives need to be looked at side-by-side. then it becomes apparent that *neither* provides a guarantee. Which makes the no-guarantee argument a bit empty.

"Fourth: Many, if not most, people want to be rewarded for their creativity and hard work."

Yes. That's why government services cost us money in the form of taxes.

"That's why entrepreneurs and investors look for marketplaces that are inefficiently served and provide an opportunity for profit. If a marketplace can't provide a profit, enterpreneurs and investors look elsewhere."

This story glosses over numerous points. The marketplace doesn't just simply offer up a profit. There are few, if any, 'inefficient' areas of our economy. Private enterprise has had its run for decades now; it has prety much filled up its niches.

What this means is that profitable markets these days must be manufactured, not found. There are various ways to do this, including:- invent something- create artificial scarcity- create artificial demand- scare or litigate a other players- create better marketing

Some of these are legitimate - a company that invents something should have the opportunity to promote it in the marketplace. Others, though, are less legitimate. Misleading advertising can create profits, sure, but creates more harm than good.

More to the point though, what this means is that if a marketplace does not provide a profit, entrepreneurs don't look elsewhere (the other niches are filled). Rather, thy begin to lobby for legislation and, if necessary, litigation. They seek to undermine competition, create bottlenecks they can profit from, strike exclusive-service agreements, or require by law the use of their own products. None of this, of course, has anything to do with providing better service, just providing more profit.

"When the government grants itself a monopoly in a particular marketplace, it removes the incentive for entrepreneurs and investors to compete for profits in that area."

The supposition is that if the government is providing a service then there is no incentive for the people who are providing that service.

But there is of course an incentive.

For one thing, the people providing the service may be altruistic, as mentioned above. They may like helping people, or may want to help society in general.

For another, they may desire fame. You can become more famous providing public services than you can making money. That's one reason why people, like, say, the Rockefellers, started making libraries after they made their money.

Third, public servants are paid. There are performance benefits and other incentives. And though the government may have a monopoly, there is plenty of competition for jobs and positions. As well, government money granted to organizations is typically done so on a competitive basis (too much so, in fact).

"Fifth: A company in the free market only makes profits if it provides better value for money than its competitors."

This is demonstrably false. Companies can provide lower value, but if they spend more on advertising, they can make more money.

"In a truly free market, large profit margins for a long period of time are relatively rare since other competitors will enter the market and drive profit margins down."

This is a counterfactual - the conditions - if they can be specified - of a "truly free market" can never be satisfied.

"If you think that the energy industry and the healthcare industries are free markets, look more closely; the government is hugely involved in these industries, with most examples of huge profit margins due to government interventions that are influenced by lobbyists from those industries."

There are huge profits in those areas - at least in the U.S. But whether this is due to government intervention is debatable.

Certainly, the lobbyists have played a role in securing profits for those companies. But that means the cause of the profits is the *companies* that hired the lobbyists.

Thanks this helped alot in my economics assignment. The question was "Why do some people believe that not everything can be left to the free market, but that governments also have a role to play in encouraging a positive "investment climate"?